Archive for November, 2020

We are all Behavioral, More or Less: A Taxonomy of Consumer Decision Making

November 30, 2020

Victor Stango & Jonathan Zinman in this new NBER paper:


The cost efficiency improvement of Norwegian banks can be explained by automation and digitalisation

November 30, 2020

Henrik Andersen of Norges Bank (Norway Central Bank) in this paper shows benefits of automation and digitalisation on banks:

Operating costs in the Norwegian banking sector have been reduced considerably in recent decades, both as a share of income and assets. This has increased banks’ resilience to increased losses and reduced the risk of crises. In this article, I analyse how costs have been reduced and the main drivers of the cost efficiency improvement. The results suggest that automation and the digitalisation of banks’ operations have played a key role in improving cost efficiency.

Our dataset shows that Norwegian banks have reduced all large cost items relative to assets. Nearly half of the decline in cost-to-assets ratios is due to
banks’ reduction of wage and personnel expenses relative to assets, which primarily reflects a reduction in the number of employees. The decline in the
cost-to-assets ratio has been dampened by the average wage of bank employees, which has risen faster than the average wage in Norway. Other
operating costs have also fallen relative to assets, among other reasons, as a result of the reduction in the number of bank offices. Increased costs for
external services and IT has restrained the decline in cost-to-assets ratios. 
To ascertain the primary drivers of improvements in Norwegian banks’ cost efficiency, I have estimated a model for developments in the cost-to-assets
ratio using a number of indicators from theory and literature. The modelexplains cost developments well. According to the model, automation and
digitalisation have reduced the cost-to-assets ratio, while more extensive and complex regulation have contributed to keeping the cost-to-income ratio
elevated. In addition, the results suggest that lower economic activity lowers the cost-to-income ratio and vice versa. 

Antitrust in the digital economy: Views of leading economists on the market dominance of technology giants

November 30, 2020

Romesh Vaitilingam of Voxeu summarises the views:

In October 2020, the US Department of Justice launched a federal antitrust lawsuit against Google, accusing the firm of abusing its dominance in the market for internet search. The IGM Forum at Chicago Booth invited its panels of leading US and European economists to express their views on the nature of the market dominance of Google and other technology giants in the digital economy, and what the appropriate policy response might be. As this column reports, among other results, when asked whether the imposition of some kind of regulation or a fundamental change in antitrust policy is warranted, a larger proportion of experts on the European panel agreed than of those on the US panel.

A Mangalorean PM and his RBI Governor Brother: The Extraordinary story of the Benegal Brothers

November 30, 2020

Superb piece by Dr Anil Shetty:

What if I told you that a Mangalorean was once a Prime Minister and was also one of the principal framers of the Constitution of India? And that his equally accomplished brother was the longest serving Governor of the Reserve Bank of India? The headline might sound like click bait, but all of it is true – this is the incredible true story of Mangalore’s Benegal brothers.  

He goes onto narrate the story of Sir Benegal Narsing Rau who became PM of J&K and even drafted the Constitution. Sir Benegal Rama Rau who became RBI Governor. The third brother became Dean of Benaras University (no small feat either).

Puliyabazi Podast part 2: From Princely State Bank to today

November 30, 2020

I joined Pranay and Saurabhi in another episode of Puliyabaazi podcast;

In this second and final episode on India’s banking system, we pick up some more interesting strands of India’s monetary history. We are joined again by Amol Agrawal (@mostlyeconomics), Assistant Professor at Amrut Mody School of Management, Ahmedabad University. 

In episode #75, Amol began with the Hundi system in India and ended at the nationalisation phase of 1969. In this episode, we find out the banking systems in the princely states, government-mandated efforts for financial inclusion, and recent developments on banking reforms.

Lots of fun recording another conversation in Hindi.


Fischer Black Prize 2021 awarded to Matteo Maggiori

November 27, 2020

Fischer Black Prize is awarded to promising young financial economists under age 40. It is the finance equivalent of John Bates Clark Medal given to economists under 40.

Fischer Black Prize for 2021 is given to Prof Maateo Maggiori of Stanford Univ:

Matteo Maggiori has been selected by the AFA to receive the 2021 Fischer Black Prize for an outstanding financial economist under age 40.  He is Associate Professor of Finance at the Stanford Graduate School of Business, where he has taught since 2019. Before joining Stanford, Matteo taught at Harvard University and New York University. His research topics have included the analysis of exchange rate dynamics, global capital flows, the international financial system, the role of the dollar as a reserve currency, tax havens, bubbles, expectations and portfolio investment, and very long-run discount rates.

He is Research Associate at the NBER in the Asset Pricing, Economics Fluctuation and Growth, International Finance, and Macroeconomics Programs. He is also Research Fellow at the CEPR. He currently serves as Associate Editor at the Journal of the European Economic Association and Associate Editor at the Journal of International Economics. He received his Ph.D. from the Haas School of Business at the University of California, Berkeley in 2012.

He could have got the Clark Medal too as his work is so much about Macro.  Prof Maggiori’s page is here.

Frenzy and Debate over a RBI Internal Working Group report: Governance, not ownership, is key

November 27, 2020

On 20-Nov-2020 RBI released a report of the “Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks”. Who would have imagined such a heavy worded report to create such a frenzy and debate.  Whatsapp groups are full of articles and discussions.

Here is my piece in Hindustan Times on the report.

I could not be more divided on a banking topic. While there is strong evidence of corporate promoters mismanaging banks, there is equally strong evidence of professionals/institution promoters mismanaging banks. It is hardly a case of black and white where only corporates are at fault.

Moreover, to think there are no corporates owning banks at present is not correct. Indusind Bank, promoted by Hindujas, is one such bank. The Indusind Bank was doing ok till the fiasco at Yes Bank created worries over Indusind as it was also a mid-size private bank.

And then we have the payment banks which are mainly owned by corporates. But this was treated as a reform back then despite critics pointing that it will lead to backdoor entry for corporates in banking. Even without a backdoor, a payment bank can do most of banking activities. They cannot give loans directly but can tie up with a major bank and give loans as suggested by the two former RBI officials.

In the end, what matters is what kind of Governance you have at all these banks/organisations.

Even Public Sector Banks do fine when the government somehow gets the right kind of people at the top and give them a good stable contract to work. But the government sadly gets this wrong most of the time leading to the current problems.

Same thing applies to private banks as well. One can argue that getting good governance is never easy but that is where majority of the problem lies. But we keep looking at ownership.


Two Goals, Two Lessons | What central bankers can learn from Diego Maradona

November 27, 2020

My tribute to Diego Maradona. I draw from this speech by Mervyn King, former Governor of Bank of England.

From Valuable to Worthless and Back Again: Pre-1950 Chinese Currency

November 26, 2020

Dr Richard Appel, a numismast has a nice piece on pre-1950 Chinese currency:

The year 1949 saw the culmination of the long, bloody Chinese civil war that had begun in 1927. That was when Chiang Kai-shek’s governing Republic forces initiated a purge of their opposition, the Chinese Communist Party, that was steadily gaining strength and followers. By the early 1930s, the Communists had re-grouped and gained control over large swaths of China. The Republic responded and by late 1934, was successful in isolating the remains of the Communist forces in Shensi Province.

Over several ensuing years the Communists gained momentum and expanded their territory. In order to finance the war, the ruling Nationalists turned to the printing press. Ultimately, the result was the destruction of the purchasing power of their currency, their economy, and the future of their followers.

In June 1937, one U.S. dollar would buy 3.7 yuan. The yuan quickly depreciated and by December 1941, one dollar was worth 18.9 yuan. At the end of 1945, it would take 1,220 yuan to purchase $1 USD. Finally, in May 1949, massive inflation had devastated the economy and disheartened the Nationalist army. Because of the incredible increase in the Chinese money supply, it would then require 23.3 million yuan to purchase one U.S. dollar.

By mid-1949 and after over 20 years of warfare, Chiang Kai-shek’s Republic forces were finally overwhelmed, and their leaders retreated to Taiwan. The new Communist government led by Mao Tse-tung had already begun issuing their own currency. For a brief time, the different currencies traded side by side. However, when the masses realized that the Communists were firmly in power and would not accept the Republic’s banknotes, the earlier notes BECAME WORTHLESS.

Literally overnight, billions of yuan that represented everyone’s wealth lost all their value. This devasted the populace. Wealthy individuals became paupers, and the poor became destitute.

The collector advises collecting Republic notes as their price s likely to rise in future:


What’s in a name: Name of Saudi Arabian Monetary Authority changed to the Saudi Central Bank

November 26, 2020

Interesting development in the middle-east.

The Saudi Arabian Monetary Authority changed its name to Saudi Central Bank and the central bank got new objectives and independence:

The Custodian of the Two Holy Mosques, King Salman bin Abdulaziz Al-Saud, has approved the Saudi Central Bank Law.

The new law includes changing the name of the Saudi Arabian Monetary Authority to the Saudi Central Bank, with direct reporting to the King. The Saudi Central Bank will continue to enjoy financial and administrative independence. This approach comes in line with international best practices for central banks. The law also stipulates that the Saudi Central Bank shall replace the Saudi Arabian Monetary Authority in all its rights and obligations.

The new law identifies the objectives of the Saudi Central Bank as follows:

    1. Maintaining monetary stability.
    2. Promoting the stability of, and enhancing confidence in, the financial sector.
    3. Supporting economic growth.

 In addition, the law confirms that the Saudi Central Bank is responsible for setting the monetary policy and choosing its instruments and procedures. It explains the relationship of the Saudi Central Bank with the government as well as relevant international entities. Moreover, it updates the governance framework of the Saudi Central Bank’s operations and decisions.

According to the new law, the Saudi Central Bank will continue to use the acronym “SAMA” due to its historic significance and relevance locally and globally. The banknotes and coins of all denominations bearing the name of the Saudi Arabian Monetary Authority will remain in circulation and keep their status as legal tender.

What would the differences be? This article gives some ideas:

While the SAMA acronym will remain, Hassan Alwatban, an economic consultant, outlined the differences between the monetary authority and the central bank.

For the central bank to perform its duties properly, he said it needed to be fully independent when it came to decision-making, especially decisions related to managing state funds.

Another difference was that the president of the central bank would not be under the state’s authority and their nomination would be made by a legislative authority. The government or state could not appoint or remove the president except by the most supreme judiciary authority.

Thirdly, he added, a government agency could not interfere in the bank’s affairs because the bank enjoyed full monetary power.

Alwatban told Arab News: “Therefore, changing the monetary authority to a central bank is healthy for the national economy.

“The tasks of the Ministry of Finance, which is responsible for financial policies, will be set apart from the tasks of the central bank, which is responsible for setting the monetary policies. Before the change, the tasks of the Ministry of Finance and SAMA overlapped.

“Besides, the Ministry of Finance was in charge of the financial policy and the monetary policy at the same time, a fact that made SAMA focus on serving the banks’ interests more than focusing on serving the interests of citizens,” he added.


Responses of International Central Banks to the COVID-19 Crisis

November 25, 2020

Jacob Haas, Christopher J. Neely, and William R. Emmons in this research paper have a useful timeline of the 4 central banks:

This article reviews and explains the recent policy reactions of the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan to the financial and macroeconomic turmoil caused by the COVID-19 pandemic. The financial and monetary policy actions of major central banks in the most recent crisis have, by some metrics, surpassed their responses to the Global Financial Crisis of 2007-09 in both swiftness and scope. 


Although the cause of the COVID-19 crisis was quite unlike that of the GFC of 2007-09, many symptoms were similar. For example, both crises spawned flights to safety that produced fire sales of risky assets. Many of the policies to alleviate those symptoms were also similar in kind, but central banks responded with unusual speed and vigor as a result of their post-2008 experience with unconventional policies.

The Fed and BOE cut short-term interest rates, while the ECB and BOJ maintained rates that were already at or below zero. All four central banks introduced or expanded broad asset purchases, special bank-lending facilities, and narrow asset purchase facilities. Extraordinarily, the ECB and BOJ are actually paying negative interest rates on bank borrowing. With the USD and euro playing important roles on international financial markets, the Fed and the ECB expanded swap lines and created repo facilities for international monetary authorities. These measures seemed to be largely successful in maintaining the functioning of financial markets.

The crisis has prompted unprecedented cooperation between fiscal and monetary authorities. Congress appropriated $454 billion for Treasury injections of capital to Fed programs, while the U.K. Treasury offered indemnity on BOE asset purchase and CCFF losses (Timiraos and Hilsenrath, 2020, and Bailey 2020a,b). The Fed, BOJ, and BOE have also designed some of their lending programs to support fiscal authority initiatives. For example, the Fed’s PPPLF and BOJ’s Special Funds-Supplying Operations for SMEs provide funding for banks that use government SME lending programs, encouraging banks to use these fiscal policy programs and lend more to SMEs. Such cooperation may make central bankers nervous about retaining their independence. 


What pay ratios in NIFTY50 companies tell us about income inequality in India?

November 24, 2020

Reetika Khera and Meghna Yadav in this ideasforindia research article:

In the wake of the economic crisis triggered by the Covid-19 pandemic and associated lockdowns, demands for relief from the corporate sector were as vocal as those for affected workers. However, the same corporates were simultaneously paying shockingly high salaries to their CEOs. Analysing data from NIFTY50 companies for 2019-20, Khera and Yadav show that large inequalities exist between remuneration of top management vis-à-vis other employees within firms, and there is little diversity among those occupying top positions.


LVB failure: Mirror mirror on the wall, which is the next bank in India to fall?

November 24, 2020

My new article in Mint (good to be writing for Mint after a long gap).

The article discusses failure of Lakshmi Vilas Bank and how some of the Old Private Sector Banks look weak as well.

While I don’t address the mirror question very specifically but there are some pointers.

Regulating Fintech in Europe: Lessons from the collapse of Wirecard

November 23, 2020

Very important research by Giorgio Barba Navaretti, Giacomo Calzolari, Alberto Pozzolo.

Regulators and central banks will soon be dealing with fintechs and their failures. Wirecard gives us some lessons for future:

The default of Wirecard highlights several problems in the regulation and supervision of Fintech companies, with regulatory holes in investor protection, customer protection, and financial stability. This column argues that since Fintech companies can be very complex, their oversight requires understanding their business model and combining regulation and supervision based on both entities and activities. The global reach of Fintechs also calls for better coordination at the European level and beyond, but the authors do not see the need for new regulatory body to oversee Fintechs in Europe.


Gulags, crime, and elite violence: origins and consequences of the Russian mafia

November 23, 2020

Jakub Lonsky of Bank of Finland in this working paper does a lot of mining of references over 100 years :

This paper studies the origins and consequences of the Russian mafia (vory-v-zakone). I web scraped a unique dataset that contains detailed biographies of more than 5,000 mafia leaders operating in 15 countries of the (former) Soviet Union at some point between 1916 and 2017.

Using this data, I first show that the Russian mafia originated in the Gulag – the Soviet system of forced labor camps which housed around 18 million prisoners in the 1920s – 1950s period.

Second, I document that the distance to the nearest camp is a strong negative predictor of mafia presence in Russia’s communities in the early post-Soviet period.

Finally, using an instrumental variable approach which exploits the spatial distribution of the gulags, I examine the effects of mafia presence on local crime and elite violence in mid-1990s Russia. In particular, I show that the communities with mafia presence experienced a dramatic rise in crime driven by turf wars which erupted among rival clans around 1993 and persisted for much of the 1990.

Further heterogeneity analysis reveals that mafia presence led to a spike in attacks against businessmen, fellow criminals, as well as law enforcement officers and judges, while politically-motivated violence remained unaffected.


Central Bank of Israel invests forex reserves in equity to boost returns

November 23, 2020

Bank of Israel Deputy Governor Andrew Abir discusses the forex reserve investment strategy of the central bank:

  1. It is important that the investment strategy for the foreign exchange reserves, subject to attaining the security and liquidity targets, generate an average return over time that is at least equal to the cost of financing the reserves (the cost of liabilities on the Bank’s balance sheet).
  2. The Bank of Israel is constantly examining ways to adjust the investment policy and the weight of risk assets in the portfolio to the changing environment.  The guidelines for the investment policy that are set out by the Monetary Committee are updated accordingly from time to time.
  3. The Bank of Israel is currently examining whether to increase the weight of equities in the foreign exchange reserves, and whether to invest in additional assets, such as a low rate of investment in corporate bonds that are below investment grade.  (Currently, investment in corporate bonds is only at investment grade, and is restricted to 7 percent of the reserves.)

    Abir described the revolution in managing the Bank of Israel’s foreign exchange reserves during the past decade.  From a portfolio that was almost entirely invested in government bonds, with a desire to maintain very high liquidity, the Bank of Israel began putting greater emphasis on the portfolio’s yield.  Today, the foreign exchange reserves include more volatile assets such as equities and investment-grade corporate bonds.   In 2012, the Bank of Israel began investing some of the reserves in equities abroad.  The start of such investments, amounting to 3 percent of the reserves, was made possible due to the increase in the reserves, and in view of the new Bank of Israel Law, which enabled investment in a broad variety of financial assets, including equities, that were not permitted under the old law.  As the trend of increasing reserves continued, the Bank of Israel also gradually increased its investments in equities.  Today, equities account for 15 percent of the foreign exchange reserves.

Interesting to note this..

China’s winning CBDC approach

November 23, 2020

Gary Smith has a nice piece in OMFIF on how Chinese recently used lottery approach to push the CBDC:

Will China’s central bank digital currency experiment be a success? Offering 50,000 Shenzhen citizens a wallet containing around $30 in a lottery has created momentum. Banning the prospect of any other form of digital money and adopting a rigorous approach to encouraging retailer acceptance has been helpful. The citizens of Shenzhen were ready for CBDC – 2m applied to participate.

The architecture of money is changing. The pandemic has led to a collapse in the use of cash around the globe. A desire to avoid touching notes and coins has combined with the expanded availability of cashless payment options in shops and a surge in online shopping.

Central banks everywhere have been jolted into action. It seems inevitable that the squeeze on cash will trigger multiple CBDC initiatives. Many will share some of the technological characteristics of cryptocurrencies like bitcoin, but will differ in three important ways. First, CBDC will probably exist on a centralised platform, and therefore will be subject to government oversight. Second, it will be denominated in the local fiat currency at a constant value. Third, CBDC and domestic cash will be interchangeable.

State ownership of banks helps push the CBDC:

Nowhere is resistance to CBDC greater than in the US, and that is in part because the commercial banking lobby is strong. Commercial banks are concerned that their role as deposit takers could be undermined by a CBDC that would be ‘gilt edged’. This would weaken their role in the money creation process. Federal Reserve Governor Jerome Powell has defended the slow pace on CDBC by arguing that the US payments system works effectively.

China does not have private sector banks. All have some degree of state ownership, so there is no comparable lobby pressure. Most Chinese consumers have never known banking that was not via a mobile device, and already have limited expectations of privacy. In short, as evidence from the lottery scheme in Shenzhen suggests, China is an ideal testing ground for CBDC.

Four state-owned banks will distribute the digital renminbi, known as the digital currency electronic payment. They will therefore be integral to its existence. There are concerns about commercial banks being disintermediated, but there are suggestions that the People’s Bank of China could re-lend DCEP deposits to the commercial banks. This would give the central bank even more oversight (and perhaps control) over the use of DCEP in the Chinese economy.

The fact that the Shenzhen lottery wins could be cancelled if not spent highlights that CBDC could be a useful monetary policy tool. Crisis support payments could be targeted at those citizens in most need, with immediate effect, rather than written on cheques and mailed to citizens (some of whom were dead) as was the case in the US earlier this year.


Bargaining power and the Phillips curve: a micro-macro analysis

November 23, 2020

Marco Jacopo Lombardi, Marianna Riggi and Eliana Viviano of BIS in this paper:

We use a general equilibrium model to show that a decrease in workers’ bargaining power amplifies the relative contribution to the output gap of adjustments along the extensive margin of labour utilization. This mechanism reduces the cyclical movements of marginal cost (and inflation) relative to those of the output gap. We show that the relationship between bargaining power and adjustments along the extensive margin (relative to the intensive margin) is supported by microdata. Our analysis relies on panel data from the Italian survey of industrial firms. The Bayesian estimation of the model using euro-area aggregate data covering the 1970-1990 and 1991-2016 samples confirms that the decline in workers’ bargaining power has weakened the inflation-output gap relationship.


When the Bank of England rescued Midland Bank in early 1990s

November 20, 2020

As we are dealing with several bank failures and rescues in India, good to read about another bank from other country.

Clive Horwood refers to an extract from the book by Prof Harold James – Making a Modern Central Bank – The Bank of England 1979-2003:

It was inherent in the mandate of the Bank of England in the 1980s and 1990s, as overseer of UK financial services, that its successes remained hidden in the shadows, while its failures were exposed to the harshest of lights.

Those two decades saw high-profile collapses, including of the Bank of Credit and Commerce International and Barings, which provoked much criticism of the Bank. This led, in 1997, to a new Labour government handing supervision of UK banking to a newly-created Financial Services Authority under the aegis of HM Treasury.

As Chancellor of the Exchequer Gordon Brown simultaneously granted it independence from the government over monetary policy, 1997 saw the biggest change in the Bank of England’s role in its 300-year history.

These events are central to a fascinating new book by Harold James, Making a Modern Central Bank – The Bank of England 1979-2003. James, professor of history at Princeton University and a leading economic historian, lifts the lid on events that prompted an economic and monetary revolution that still reverberates through global finance today.

The book, the events and issues it covers, and the implications of those events to financial markets today, will be discussed during an OMFIF meeting on Monday 23 November which will feature the participation of many of the leading actors in these dramas. They include Mervyn King, Norman Lamont and Ed Balls.

James, who was granted unprecedented access to the Bank’s archives and spoke to many of the leading Bank officials, uncovers an important bank intervention that has remained out of the public realm, until now.

In an extract from the book below, James tells of how in 1991 Midland Bank was close to collapse and the Bank stepped in quickly, effectively and with the utmost secrecy, to save it.

This was the Bank at its best, using its knowledge, financial firepower and absolute authority to shore up Midland, bring in new leadership (no easy task given the personalities involved) and prevent a collapse. Midland’s failure would have cost the UK billions in bail-outs and lost economic activity, and might have spread to a wider banking crisis as happened in the early 1990s in other European countries. A year later, Midland’s future was secured through its takeover by HSBC – a marriage that Bank officials, including the governor, doubted would ever happen.

These revelations prompt a number of questions that are still relevant today. If Brown and the Labour party had known of the Bank’s success in saving Midland, might that have outweighed their concerns about its failures? But how could Brown have known when even senior government and Treasury officials in 1991 had no knowledge of the intervention? If the Bank had remained in charge of supervision of banks in the run-up to the 2008 financial crisis, might it have foreseen some of the problems building up at the likes of the Royal Bank of Scotland, HBOS and Northern Rock and stepped in, saving taxpayers hundreds of billions?


The impact of the pandemic on cultural capital in the finance industry

November 20, 2020

Kevin Stiroh of New York Fed in this speech discusses how and whether the pandemic will impact culture in financial industry:

From the perspective of cultural capital, this sudden and dramatic shift in how we work raises multiple questions. First, how does cultural capital influence outcomes in this new environment? How are we drawing on, or depleting, the cultural capital that already existed? Does this environment pose new challenges regarding behavioral risk? And finally, is it possible to identify new opportunities to build cultural capital in a predominately remote environment?

As we look across the industry, hear the experiences of firms and read the emerging literature, like the recent report by the UK FCA, one can identify factors that are likely to impact, and possibly erode, cultural capital.6 I’ll outline several areas where these dynamics may be at play, including loss of personal interactions, severed networks, uncertainty, and decreased monitoring and oversight.

Details in the speech.

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